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By the end of this section, you will be able to:

  • Understand the arguments for and against requiring the U.S. federal budget to be balanced
  • Consider the long-run and short-run effects of a federal budget deficit

For many decades, going back to the 1930s, proposals have been put forward to require that the U.S. government balance its budget every year. In 1995, a proposed constitutional amendment that would require a balanced budget passed the U.S. House of Representatives by a wide margin, and failed in the U.S. Senate by only a single vote. (For the balanced budget to have become an amendment to the Constitution would have required a two-thirds vote by Congress and passage by three-quarters of the state legislatures.)

Most economists view the proposals for a perpetually balanced budget    with bemusement. After all, in the short term, economists would expect the budget deficits and surpluses to fluctuate up and down with the economy and the automatic stabilizers. Economic recessions should automatically lead to larger budget deficits or smaller budget surpluses, while economic booms lead to smaller deficits or larger surpluses. A requirement that the budget be balanced each and every year would prevent these automatic stabilizers from working and would worsen the severity of economic fluctuations.

Some supporters of the balanced budget amendment like to argue that, since households must balance their own budgets, the government should too. But this analogy between household and government behavior is severely flawed. Most households do not balance their budgets every year. Some years households borrow to buy houses or cars or to pay for medical expenses or college tuition. Other years they repay loans and save funds in retirement accounts. After retirement, they withdraw and spend those savings. Also, the government is not a household for many reasons, one of which is that the government has macroeconomic responsibilities. The argument of Keynesian macroeconomic policy is that the government needs to lean against the wind, spending when times are hard and saving when times are good, for the sake of the overall economy.

There is also no particular reason to expect a government budget to be balanced in the medium term of a few years. For example, a government may decide that by running large budget deficits, it can make crucial long-term investments in human capital    and physical infrastructure    that will build the long-term productivity of a country. These decisions may work out well or poorly, but they are not always irrational. Such policies of ongoing government budget deficits may persist for decades. As the U.S. experience from the end of World War II up to about 1980 shows, it is perfectly possible to run budget deficits almost every year for decades, but as long as the percentage increases in debt are smaller than the percentage growth of GDP, the debt/GDP ratio will decline at the same time.

Nothing in this argument should be taken as a claim that budget deficits are always a wise policy. In the short run, a government that runs a very large budget deficit can shift aggregate demand to the right and trigger severe inflation. Additionally, governments may borrow for foolish or impractical reasons. The Macroeconomic Impacts of Government Borrowing will discuss how large budget deficits, by reducing national saving, can in certain cases reduce economic growth and even contribute to international financial crises. A requirement that the budget be balanced in each calendar year, however, is a misguided overreaction to the fear that in some cases, budget deficits can become too large.

No yellowstone park?

The federal budget shutdown of 2013 illustrated the many sides to fiscal policy and the federal budget. In 2013, Republicans and Democrats could not agree on which spending policies to fund and how large the government debt should be. Due to the severity of the recession in 2008–2009, the fiscal stimulus, and previous policies, the federal budget deficit and debt was historically high. One way to try to cut federal spending and borrowing was to refuse to raise the legal federal debt limit, or tie on conditions to appropriation bills to stop the Affordable Health Care Act. This disagreement led to a two-week shutdown of the federal government and got close to the deadline where the federal government would default on its Treasury bonds. Finally, however, a compromise emerged and default was avoided. This shows clearly how closely fiscal policies are tied to politics.

Key concepts and summary

Balanced budget amendments are a popular political idea, but the economic merits behind such proposals are questionable. Most economists accept that fiscal policy needs to be flexible enough to accommodate unforeseen expenditures, such as wars or recessions. While persistent, large budget deficits can indeed be a problem, a balanced budget amendment prevents even small, temporary deficits that might, in some cases, be necessary.

Questions & Answers

five positive economic statement
Paulina Reply
Five positive economic statement and normative economic statement
Paulina
How can capital market be better in the future
Hammed Reply
Capital market Capital market - The market of debt or equity securities
Abdullah
help provide equitable distribution of income if, lending policies are less stifle and also curb unemployment and poverty by promoting entrepreneurship
Max
by advancing in technology, accumulation of machinery and other capital and better education and human capital all lead to increased economic growth and make the market better for the future.
odebode
pls wat is production possibility curve
Hasia Reply
economic is an art or science?
Karn Reply
both
Bilal
is science
Hasia
what is microeconomics and macroeconomics
Usman Reply
microeconomic deal with the study of individual firms and household and macroeconomics deal with the economy as a whole.
Ebenezer
difine VAT,, and give advantage and disadvantage VAT
Barack
definition of Monopoly
malonzy Reply
Sir bsc ki economic ke ghraph ki book send karin
Bilal
wat is meant by monopoly
Hasia
monopoly is a process whereby one supplier and lot of damands in the market
dassikells
this is where there is only one supplier in the market with many buyers
Isaac
Monopoly is the type of market where only one person sells a commodity to many buyers,that is one seller with many buyers
Opoku
Wat is the importance of economics
Vicky Reply
it broaden one's mind
malonzy
it help us to make good choices
Yussif
it helps to make efficient use of our scarce resources
Hasia
helps in allocation of the scarce resources to many/myriad human wants
Isaac
what is an efficient wage and how it causes structural unemployment and how it could be shown graphically?
Amos Reply
economics is a social science and an art discuss
Kerry Reply
further explanation on the definition
Samuel Reply
is demand the same as quantity demanded
Samuel
literally, demand is not the same as quantity demanded. While quantity demanded is directly and particularly related to price, demand is the various relations that exist between quantity demanded and price of a commodity.
Austin
what is business economics
Nelson Reply
business economics is the way the society uses its limited resources to satisfy their unlimited wants
Sekai
what is business economics
THOMAS Reply
how did Mc connel defined economics
Isaac Reply
what is a economy planning?
Jacob Reply
what is demand
Sunday Reply
demand means desire for a commodity backed by willingness & ability to pay for that commodity
Rajesh
what is supply
Akoheni
supply means suppliers supplying more commodities when price's high or less when price's low to satisfy human want
Prince
the coefficient of price elasticity of supply is the measure of percentage change in the quantity supplied of a good due to a given percentage change in its price.
Khushiba
Please what is Economics of Scales?
Prince
what is cardinal and ordinal utility?
Khushiba
Cardinal utility is the satisfaction derived by the consumers from the consumption of goods and services while ordinal is ranked in terms of preference.
Grace
👍
Khushiba
Please explain what is meant by Economic Integration?
Prince
Please I need help!!!!
Prince
economics scales I don't know but I know laws of returns to scale
Khushiba
hello
TIMAH
hello
Khushiba
can someone help explain to me what is fairly inelastic dd
TIMAH
Economics Economics - The study of how people use their limited resources to try to satisfy unlimited wants
Abdullah
Economic integration has been one of the main economic developments affecting international trade in the last years. Countries have wanted to engage in economic cooperation to use their respective resources more effectively and to provide large markets for member-countries of the resulting integrate
Abdullah
Inelastic Demand When consumers are relatively unresponsive to price changes. A PED coefficient of less than one means that a particular change in the price of a good will be met by a proportionally smaller change in the quantity demanded.
Abdullah
demand refers to goods and services that a consumer is willing and able to buy at given rate over a given period of time
Freeman
Demand  - The entire relationship between the quantity of product that buyers wish to purchase per period time and the price of that product..
Abdullah
what are the factor that affect demand
akbal
The factors that affect demand Price Price of the other commodity Wheather and climate conditions
Zaharaddeen

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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